The Stern Review: The Economics of Climate Change, published at the end of October, is comprehensive analysis of the economics of climate change. Commissioned by the British Chancellor and authored by Sir Nicholas Stern, head of the Government Economic Service and former World Bank economist, it estimates that uncontrolled climate change will cost at least five percent of global GDP per year. Considering wider range of risks and impacts, the estimates rise to 20 percent of GDP or more. However, the review finds the costs associated with reducing greenhouse gas emissions could be limited to about one percent of global GDP per year.
The review emphasises that if action is not taken to reduce emissions (ie, carbon pricing, urgent development of low-carbon and high-efficiency technologies and removal of barriers to behavioural change – poor information and transaction costs), there could be major disruption to economic and social activity which will be difficult, maybe impossible, to reverse.
So what is the Stern Review’s significance for New Zealand? Firstly, it will influence the policies of our major trading partners: Australia, the United States, Japan, China and the United Kingdom.
UK Chancellor Gordon Brown endorsed the view that global carbon emissions trading system is one of the best ways to promote cost-effective reduction in emissions. He said that the EU scheme established to meet Kyoto targets should be linked with large emitters worldwide, enabling global carbon price to be set, fixing clear cost for pollution.
Australia and the US refused to ratify the Kyoto Protocol, opting for participation in the Asia-Pacific Partnership on Clean Development and Climate, an alliance of the world’s biggest polluter countries emphasising low emission fuel projects. Australia has expressed the view that it will only commit to emissions trading as part of global response.
While the points of emphasis differ, New Zealand must ensure its policy response is in line with the responses of these major trading partners.
Secondly, the review is an opportunity by protectionists to oppose New Zealand exports. The concept of “food miles” to measure the distance to transport food to market, provides crude measure of the fossil fuel component. Proponents argue for barriers against New Zealand exports because of high food miles. Other researchers have argued that carbon emissions profile along the supply chain – which shows New Zealand’s efficiency – is more accurate. Accurate or not, food miles are marketing tool for New Zealand competitors that will need to be combated.
While the Stern Review presents sobering picture of the effect of climate change for the global economy, New Zealand should not reduce its own carbon emissions to its economic disadvantage. New Zealand contributes only 0.2 percent of the world’s carbon emissions; meaningful reductions in emissions will only take place when large producers, such as the United States, and growing industrial powers, such as India and China, limit their emissions. We should focus on our own economic interests, yet ensure that we are consistent with major trading partners.
Emissions trading is vital to any future reduction of global carbon emissions and New Zealand must participate. The Government has already shown some interest, with its Projects to Reduce Emissions and Permanent Forest Sink Initiatives and interest in an emissions trading scheme to be considered by the Australian Federal government.
However, we must ensure that the development of any scheme in which we participate, and the timing, is in line with that of our major trading partners.
The effect on New Zealand businesses is significant. Climate change policies will create business winners and losers. The winners will be those that get their strategy right, enabling early recognition and exploitation of opportunities. New markets will be created in low-carbon energy technologies and other low-carbon goods and services potentially worth billions of dollars.
Climate change issues affect both national leadership and business management. Political and intellectual leadership is important to ensure that New Zealand’s policy response is appropriate; here, firm alignment with our major trading partners, rather than unique standalone New Zealand response, is advocated.
From management perspective, wherever business sits in the New Zealand economy it will be affected. All businesses need to develop an appropriate strategy if they are to cope, and even profit, from climate change.
Bryan Gundersen is partner in national law firm Kensington Swan. He specialises in energy and resources, and climate change.
